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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{X} Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended November 1, 2003 or
{ } Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ________________
Commission File Number - 0-26229
BARNEYS NEW YORK, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-4040818
-------- ------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
575 Fifth Avenue, New York, New York 10017
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 339-7300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes {X} No { }
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes { } No {X}
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes {X} No { }
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of December 12, 2003 there were 14,103,227 shares of Barneys New
York, Inc. common stock, par value $0.01 per share, outstanding.
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BARNEYS NEW YORK, INC.
FORM 10-Q
QUARTER ENDED November 1, 2003
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated statements of operations - Three and nine months
ended November 1, 2003 and November 2, 2002 3
Condensed consolidated balance sheets - November 1, 2003 and February 1, 2003 4
Condensed consolidated statements of cash flows - Nine months
ended November 1, 2003 and November 2, 2002 5
Notes to condensed consolidated financial statements - November 1, 2003 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 29
ITEM 4. Controls and Procedures 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 30
ITEM 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
Barneys New York, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
---------------- ---------------- -------------- --------------
Net sales $ 111,893 $ 103,299 $ 291,985 $ 277,378
Cost of sales 61,188 57,050 159,949 148,503
---------------- ---------------- -------------- --------------
Gross profit 50,705 46,249 132,036 128,875
Expenses:
Selling, general and administrative expenses
(including occupancy costs) 40,775 39,739 115,468 113,713
Depreciation and amortization 2,891 2,660 8,525 7,914
Other income - net (1,209) (1,596) (4,486) (4,463)
---------------- ---------------- -------------- --------------
Operating income 8,248 5,446 12,529 11,711
Interest and financing costs, net of interest income 3,957 2,471 11,250 8,501
---------------- ---------------- -------------- --------------
Income before income taxes 4,291 2,975 1,279 3,210
Income taxes 150 98 450 294
---------------- ---------------- -------------- --------------
Net income $ 4,141 $ 2,877 $ 829 $ 2,916
================ ================ ============== ==============
Basic net income per share of common stock $ 0.29 $ 0.21 $ 0.06 $ 0 .21
================ ================ ============== ==============
Diluted net income per share of common stock $ 0.29 $ 0.21 $ 0.06 $ 0. 21
================ ================ ============== ==============
Weighted average number of shares of common stock outstanding:
Basic 14,103 13,903 14,103 13,903
================ ================ ============== ==============
Diluted 14,464 13,903 14,384 13,903
================ ================ ============== ==============
The accompanying notes are an integral part of these financial statements.
3
Barneys New York, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(UNAUDITED)
NOVEMBER 1, FEBRUARY 1,
2003 2003
---------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 4,747 $ 7,111
Receivables, less allowances of $4,335 and $4,225 29,672 24,957
Inventories 67,910 62,252
Other current assets 8,075 7,908
---------------- -----------------
Total current assets 110,404 102,228
Fixed assets at cost, less accumulated depreciation
and amortization of $45,815 and $37,290 47,557 50,463
Excess reorganization value 147,764 147,764
Other assets 8,383 1,338
---------------- -----------------
Total assets $ 314,108 $ 301,793
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 425
Revolving credit facility 8,123 10,480
Accounts payable 23,171 20,747
Accrued expenses 27,511 33,029
---------------- -----------------
Total current liabilities 58,805 64,681
Long-term debt 89,800 65,051
Other long-term liabilities 6,200 15,977
Series A Redeemable Preferred Stock - Aggregate liquidation preference $2,000 500 500
Stockholders' equity:
Common stock--$.01 par value; authorized
25,000,000 shares--shares issued 14,103,227 and 13,903,227 141 139
Additional paid-in capital 169,187 166,390
Other comprehensive income 87 496
Retained deficit (10,612) (11,441)
---------------- -----------------
Total stockholders' equity 158,803 155,584
---------------- -----------------
Total liabilities and stockholders' equity $ 314,108 $ 301,793
================ =================
The accompanying notes are an integral part of these financial statements.
4
Barneys New York, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 1, NOVEMBER 2,
2003 2002
----------------- -------------------
Cash flows from operating activities:
Net income $ 829 $ 2,916
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 11,592 8,939
Write-off of unamortized bank fees 364 641
Deferred compensation 318 -
Deferred rent 2,220 1,774
(Increase) decrease in:
Receivables (4,715) (4,490)
Inventories (5,658) (10,915)
Other current assets (44) 565
Long-term assets (1,901) -
(Decrease) increase in:
Accounts payable and accrued expenses (3,093) (6,878)
----------------- -------------------
Net cash used in operating activities (88) (7,448)
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset additions (5,619) (9,760)
Reduction in restricted cash - 200
----------------- -------------------
Net cash used in investing activities (5,619) (9,560)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit agreement 330,881 338,690
Repayments of credit agreement (340,812) (325,548)
Proceeds from senior note offering 90,100 -
Repayment of long term debt (58,064) -
Payment of deferred rent obligation (12,000) -
Debt origination costs (6,762) (1,458)
----------------- -------------------
Net cash provided by financing activities 3,343 11,684
----------------- -------------------
Net decrease in cash and cash equivalents (2,364) (5,324)
Cash and cash equivalents - beginning of period 7,111 10,835
----------------- -------------------
Cash and cash equivalents - end of period $ 4,747 $ 5,511
================= ===================
The accompanying notes are an integral part of these financial statements.
5
BARNEYS NEW YORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Barneys New York, Inc. ("Holdings") and subsidiaries (collectively
the "Company") is a leading upscale retailer of men's, women's and children's
apparel and accessories and items for the home. The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended November 1, 2003 are not
necessarily indicative of the results for the entire year.
The balance sheet at February 1, 2003 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in Holdings' Annual Report on Form
10-K for the fiscal year ended February 1, 2003.
(2) Debt
Long-Term Debt consisted of the following at:
(000's) November 1, February 1,
2003 2003
---------------------------------
9.000% Senior secured notes $ 89,800 $ -
Term loan borrowings - 7,150
$22,500 Subordinated Note - 22,112
Equipment Notes - 35,789
-------------- --------------
Total $ 89,800 $ 65,051
============== ==============
On April 1, 2003, the Company completed an offering of 106,000 units
at a price of $850 per unit, for gross proceeds of $90.1 million. Each unit
consisted of $1,000 principal amount at maturity of 9.000% senior secured notes
due April 1, 2008 of Barney's, Inc., a wholly owned subsidiary of Holdings, and
one warrant to purchase 3.412 shares of common stock of Holdings at an exercise
price of $0.01 per share. $106.0 million aggregate principal amount at maturity
of notes were issued, together with an aggregate of 106,000 warrants to acquire
an aggregate of 361,672 shares of common stock of Holdings. The warrants expire
on April 1, 2008. Approximately $1.9 million of the proceeds from the offering
was allocated to the warrants and the remainder of the proceeds was allocated to
the notes. The total debt discount of $17.8 million is being amortized over the
life of the notes. Interest is payable semi-annually on April 1 and October 1
commencing on October 1, 2003.
6
On or after April 1, 2006 and April 1, 2007, Barney's, Inc., at its
option, may redeem some or all of the notes at a redemption price of 109.894% of
accreted value, and 100% of principal amount at maturity, respectively, in all
cases plus accrued and unpaid interest. Prior to April 1, 2005, Barney's, Inc.
can utilize the proceeds of certain equity offerings to redeem up to 35% of the
aggregate principal amount at maturity of the notes, at a redemption price equal
to 113.192% of accreted value plus accrued and unpaid interest. If Barney's,
Inc. experiences a change of control, each holder of the notes will have the
right to sell to Barney's, Inc. all or a portion of their notes at 101% of their
accreted value, plus accrued and unpaid interest, to the date of repurchase.
The Company entered into a registration rights agreement relating to
the notes, pursuant to which the Company was required to file one or more
registration statements within specified time periods to provide for the
exchange of the notes for freely tradable notes with substantially identical
terms. During the third quarter the Company satisfied its obligations under this
agreement.
In connection with the offering, Holdings agreed that upon receipt of
a written request from the holders of at least 5% of the shares issuable upon
exercise of the warrants, Holdings will, as promptly as practicable, file a
shelf registration statement covering the resale of the shares issuable upon
exercise of the warrants. Holdings may, at its option, file a registration
statement covering the resale of the shares issuable upon exercise of the
warrants.
Net proceeds to the Company from the offering were approximately
$81.7 million after deducting commissions, financial advisory fees and estimated
expenses (collectively referred to as the "Offering Fees") of the offering. The
Offering Fees of approximately $8.4 million were deferred and are included in
other assets. Such amount will be amortized to interest expense over the term of
the notes. The net proceeds from the offering were used to repay the $22.5
million Subordinated Note; the Equipment Notes; the Term Loan and a portion of
the Revolver loans outstanding under the GE Facility; and a substantial portion
of the Company's deferred lease obligations pursuant to its flagship leases. The
prepayment of the $22.5 million Subordinated Note and the Equipment Notes
aggregated approximately $58.1 million and resulted in a gain on early
extinguishments of debt of approximately $200,000.
The 9.000% senior secured notes are guaranteed on a senior secured
basis by Holdings and each of the existing and future domestic restricted
subsidiaries of Barney's, Inc. The 9.000% senior secured notes and the related
guarantees are secured by a second-priority lien on the same assets that secure
the Company's credit facility.
7
(3) Income Taxes
The Company provides United States federal income taxes based on its
estimated annual effective tax rate for the fiscal year. For the three and nine
months ended November 1, 2003 and November 2, 2002, a provision for federal
income taxes has not been recorded due to the significant net operating loss
carry-forwards available to the Company. In the respective periods, however, the
Company has provided income taxes principally for state, local and franchise
taxes.
(4) Earnings Per Share ("EPS")
Basic EPS is computed as net income available to common stockholders
divided by the weighted average number of common shares outstanding. Diluted EPS
reflects the incremental increase in common shares outstanding assuming the
exercise of stock options and warrants that would have had a dilutive effect on
EPS. Net income attributed to common stockholders is not materially affected by
the 1% dividend on the 5,000 issued and outstanding shares of preferred stock.
Options to acquire an aggregate of 1,627,234 shares of common stock
were not included in the computation of diluted earnings per common share for
the three and nine months ended November 1, 2003 as including them would have
been anti-dilutive. Options to acquire an aggregate of 1,734,464 shares of
common stock were not included in the computation of diluted earnings per common
share for the three and nine months ended November 2, 2002, as including them
would have been anti-dilutive.
The following is an analysis of the differences between basic and
diluted earnings per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share".
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
NOVEMBER NOVEMBER NOVEMBER NOVEMBER
1, 2003 2, 2002 1, 2003 2, 2002
-------- -------- -------- --------
(in thousands)
Weighted average common shares outstanding.................. 14,103 13,903 14,103 13,903
Effect of dilutive securities:
Warrants................................................. 361 - 281 -
------ ------ ------ ------
Weighted average common shares outstanding and common share
equivalents............................................. 14,464 13,903 14,384 13,903
====== ====== ====== ======
8
(5) Stock-based Compensation
Pro-forma disclosures, as required by Statement of Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", are computed as if the Company recorded compensation
expense based on the fair value for stock-based awards or grants. The following
pro-forma information includes the effects of the options discussed above.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
NOVEMBER NOVEMBER NOVEMBER NOVEMBER
1, 2003 2, 2002 1, 2003 2, 2002
-------- -------- -------- --------
Net income -as reported............................................... $ 4,141 $ 2,877 $ 829 $ 2,916
Deduct: Stock-based employee compensation expense determined under
fair value method, net of related tax effects...................... (274) (352) (822) (1,056)
-------- -------- -------- --------
Pro-forma net income.................................................. $ 3,867 $ 2,525 $ 7 $ 1,860
======== ======== ======== ========
Net income per share:
Basic and diluted-- as reported....................................... $ 0.29 $ 0.21 $ 0.06 $ 0.21
Basic and diluted-- pro-forma......................................... 0.27 0.18 0.00 0.13
As of November 1, 2003, Holdings' common stock was quoted on the
Over-The-Counter Bulletin Board, but was only traded on a limited or sporadic
basis and there was no established public trading market for such common stock.
(6) Comprehensive Income
Comprehensive income is comprised of net income and the effect of
changes in unrealized gains and losses on forward exchange contracts used to
hedge merchandise commitments. For the three and nine months ended November 1,
2003, the Company's total comprehensive income amounted to $4.0 million and
$420,000, respectively.
(7) New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities ("VIE's"), an interpretation of
Accounting Research Bulletin No. 51" ("Interpretation No. 46"). Interpretation
No. 46 requires the consolidation of entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in an entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling financial interest
through ownership of a majority voting interest in the entity. The provisions of
Interpretation No. 46 are required to be adopted by the Company immediately for
all VIE's entered into since February 2, 2003, and by the end of the fiscal year
ending January 31, 2004, for all VIE's that existed prior to February 2, 2003.
The Company is currently evaluating the requirements and impact of
Interpretation No. 46, however, at the present time, the Company does not
believe there are any additional entities that will require disclosure or
consolidation as a result of the provisions of Interpretation No. 46.\
9
In May 2003, the FASB issued Statement No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company adopted SFAS No. 150 in the third quarter ended November
1, 2003. The adoption of SFAS No. 150 did not have a material effect on the
Company's consolidated financial statements.
In 2002, the FASB Emerging Issues Task Force ("EITF") issued EITF No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses the
accounting by a reseller for consideration received from a vendor. A consensus
was reached that cash consideration is presumed to be a reduction in the price
of a vendor's product that should be recognized as a reduction of cost of sales.
However, this presumption can be overcome when the consideration received is for
the reimbursement of specific, identifiable and incremental costs of the
reseller. In that event, the consideration, subject to a threshold, is
recognized as a reduction in selling, general and administrative expenses. The
provisions of EITF 02-16 are effective for all new arrangements, or
modifications to existing arrangements, entered into after December 31, 2002.
In the three months ended November 1, 2003, the implementation of the
provisions of EITF 02-16 had the effect of increasing selling, general and
administrative expenses by $666,000, and decreasing cost of sales and net income
by $628,000 and $38,000, respectively. For the nine months ended November 1,
2003, the implementation of the provisions of EITF 02-16 had the effect of
increasing selling, general and administrative expenses by approximately $1.1
million and decreasing cost of sales and net income by approximately $1.1
million and $38,000, respectively. EITF 02-16 had no impact on the Company's
cash flows. Had EITF 02-16 been in effect for the three months ended November 2,
2002 selling, general and administrative expenses would have increased by
$335,000, and cost of sales and net income would have decreased by $307,000 and
$28,000, respectively. Had EITF 02-16 been in effect for the nine months ended
November 2, 2002, selling, general and administrative expenses would have
increased by approximately $631,000 and cost of sales and net income would have
decreased by approximately $603,000 and $28,000, respectively.
(8) Other
On or about July 31, 2002, an individual filed a class action
complaint against the Company in the Superior Court for the State of California,
County of San Diego. The complaint alleged two causes of action for purported
violations of California's Civil Code and Business and Professions Code relating
to the alleged requesting by the Company of certain information. The complaint
sought relief on a class basis under the statutes permitting a plaintiff to
recover a fine, in the discretion of the court, and such other damages which
each member of the class may have suffered as a result of our alleged conduct.
The complaint further sought an accounting of all moneys and profits received by
us in connection with the alleged violations as well as injunctive relief with
respect to the alleged practices. Certification of the class and attorneys fees
were sought by the complaint as well. On August 28, 2003, this matter was
settled by order of the court for an immaterial amount.
10
In addition, the Company is involved in various legal proceedings
which are routine and incidental to the conduct of its business. Management
believes that none of these proceedings, if determined adversely to the Company,
would have a material effect on its financial condition or results of
operations.
(9) Condensed Consolidating Financial Information
On April 1, 2003, Barney's, Inc., a wholly owned subsidiary of
Holdings, issued $106.0 million principal amount of its 9.000% senior secured
notes due April 1, 2008, as more fully discussed in Note 2 above. The guarantor
subsidiaries are 100% owned by Holdings. These notes have been fully and
unconditionally, jointly and severally guaranteed by Holdings and each of the
existing and future domestic restricted subsidiaries of Barney's, Inc. Subject
to certain exceptions, Barney's, Inc. is restricted in its ability to make funds
available to Holdings. The following condensed consolidating financial
information of the Company is being provided pursuant to Article 3-10(d) of
Regulation S-X.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 1, 2003
-----------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales............................. $ -- $ 98,573 $ 13,320 $ -- $ -- $ 111,893
Cost of sales......................... -- 55,057 6,131 -- -- 61,188
---------- ----------- --------- --------- ---------- -----------
Gross profit....................... -- 43,516 7,189 -- -- 50,705
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense)........................... 106 36,973 3,696 -- -- 40,775
Depreciation and amortization........ -- 2,705 186 -- -- 2,891
Other income-- net................... -- (1,209) -- -- -- (1,209)
---------- ----------- --------- --------- ---------- -----------
Operating (loss) income............ (106) 5,047 3,307 -- -- 8,248
Equity in net income of
subsidiary........................ (4,397) -- -- -- 4,397 --
Interest and financing costs,
net of interest income............... -- 3,957 -- -- -- 3,957
---------- ----------- --------- --------- ---------- -----------
Income before income taxes......... 4,291 1,090 3,307 -- (4,397) 4,291
Income taxes.......................... 150 -- -- -- -- 150
---------- ----------- --------- --------- ---------- -----------
Net income......................... $ 4,141 $ 1,090 $ 3,307 $ -- $ (4,397) $ 4,141
========== =========== ========= ========= ========== ===========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 2, 2002
-------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales....................... $ -- $ 91,781 $ 11,518 $ -- $ -- $ 103,299
Cost of sales................... -- 51,753 5,297 -- -- 57,050
----------- ----------- --------- --------- ---------- -----------
Gross profit................. -- 40,028 6,221 -- -- 46,249
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense)..................... -- 36,061 3,678 -- -- 39,739
Depreciation and
amortization................. -- 2,324 336 -- -- 2,660
Other income-- net............. -- (1,596) -- -- -- (1,596)
----------- ----------- --------- --------- ---------- -----------
Operating income............... -- 3,239 2,207 -- -- 5,446
Equity in net income of subsidiary (2,975) -- -- -- 2,975 --
Interest and financing
costs, net of interest
income........................ -- 2,471 -- -- -- 2,471
----------- ----------- --------- --------- ---------- -----------
Income before income taxes 2,975 768 2,207 -- (2,975) 2,975
Income taxes.................... 98 -- -- -- -- 98
----------- ----------- --------- --------- ---------- -----------
Net income.................. $ 2,877 $ 768 $ 2,207 $ -- $ (2,975) $ 2,877
=========== =========== ========= ========= ========== ===========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 1, 2003
-------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ -------------
(IN THOUSANDS)
Net sales....................... $ -- $ 255,925 $ 36,060 $ -- $ -- $ 291,985
Cost of sales................... -- 140,880 19,069 -- -- 159,949
----------- ----------- --------- --------- ---------- -----------
Gross profit................. -- 115,045 16,991 -- -- 132,036
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense)..................... 318 104,458 10,692 -- -- 115,468
Depreciation and
amortization................. -- 7,974 551 -- -- 8,525
Other income-- net............. -- (4,486) -- -- -- (4,486)
----------- ----------- --------- --------- ---------- -----------
Operating (loss) income........ (318) 7,099 5,748 -- -- 12,529
Equity in net income of
subsidiary................... (1,597) -- -- -- 1,597 --
Interest and financing
costs, net of interest
income........................ -- 11,250 -- -- -- 11,250
----------- ----------- --------- --------- ---------- -----------
Income (loss) before income taxes 1,279 (4,151) 5,748 -- (1,597) 1,279
Income taxes.................... 450 -- -- -- -- 450
----------- ----------- --------- --------- ---------- -----------
Net income (loss)............ $ 829 $ (4,151) $ 5,748 $ -- $ (1,597) $ 829
=========== =========== ========= ========= ========== ===========
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 2, 2002
-----------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net sales....................... $ -- $ 244,547 $ 32,831 $ -- $ -- $ 277,378
Cost of sales................... -- 131,285 17,218 -- -- 148,503
----------- ----------- --------- --------- ---------- -----------
Gross profit................. -- 113,262 15,613 -- -- 128,875
Expenses:
Selling, general and
administrative expenses
(including occupancy
expense)..................... -- 102,750 10,963 -- -- 113,713
Depreciation and
amortization................. -- 6,729 1,185 -- -- 7,914
Other income-- net............. -- (4,463) -- -- -- (4,463)
----------- ----------- --------- --------- ---------- -----------
Operating income............... -- 8,246 3,465 -- -- 11,711
Equity in net income of subsidiary (3,171) -- -- -- 3,171 --
Interest and financing
costs, net of interest
income........................ (39) 8,540 -- -- -- 8,501
----------- ----------- --------- --------- ---------- -----------
Income (loss) before income
taxes......................... 3,210 (294) 3,465 -- (3,171) 3,210
Income taxes.................... 294 -- -- -- -- 294
----------- ----------- --------- --------- ---------- -----------
Net income (loss)............ $ 2,916 $ (294) $ 3,465 $ -- $ (3,171) $ 2,916
=========== =========== ========= ========= ========== ===========
14
CONDENSED CONSOLIDATING BALANCE SHEET
NOVEMBER 1, 2003
---------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents......... $ -- $ 4,242 $ 505 $ -- $ -- $ 4,747
Receivables, less allowances
of $4,335........................ -- 29,363 309 -- -- 29,672
Inventories....................... -- 54,809 13,101 -- -- 67,910
Other current assets.............. 2,039 5,738 298 -- -- 8,075
------------ ----------- ---------- ---------- ------------ -----------
Total current assets........... 2,039 94,152 14,213 -- -- 110,404
Fixed assets at cost, less
accumulated depreciation and
amortization of $45,815........... -- 44,972 2,585 -- -- 47,557
Excess reorganization value........ -- 147,764 -- -- -- 147,764
Investment in and advances to
subsidiary........................ 159,151 29,660 -- -- (188,811) --
Other assets....................... -- 8,372 11 -- -- 8,383
------------ ----------- ---------- ---------- ------------ -----------
Total assets................... $ 161,190 $ 324,920 $ 16,809 $ -- $ (188,811) $ 314,108
============ =========== ========== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility......... $ -- $ 8,123 $ -- $ -- $ -- $ 8,123
Net affiliate payable............. -- 120,131 39,066 -- (159,197) --
Accounts payable.................. -- 22,916 255 -- -- 23,171
Accrued expenses.................. 542 21,164 5,805 -- -- 27,511
------------ ----------- ---------- ---------- ------------ -----------
Total current liabilities...... 542 172,334 45,126 -- (159,197) 58,805
Long-term debt..................... -- 89,800 -- -- -- 89,800
Other long-term liabilities........ 1,432 6,209 (1,441) -- -- 6,200
Series A Redeemable Preferred
Stock--Aggregate
liquidation preference $2,000..... 500 -- -- -- -- 500
Commitments and contingencies
Stockholders' equity:
Preferred stock................... -- -- 214 -- (214) --
Common stock-- $.01 par
value; authorized
25,000,000 shares --
issued 14,103,227 shares......... 141 -- 341 -- (341) 141
Additional paid-in capital........ 169,187 -- 45,176 -- (45,176) 169,187
Accumulated other comprehensive
income......................... -- 87 -- -- -- 87
Retained deficit.................. (10,612) 56,490 (72,607) -- 16,117 (10,612)
------------ ----------- ---------- ---------- ------------ -----------
Total stockholders' equity..... 158,716 56,577 (26,876) -- (29,614) 158,803
------------ ----------- ---------- ---------- ------------ -----------
Total liabilities and
stockholders' equity.............. $ 161,190 $ 324,920 $ 16,809 $ -- $ (188,811) $ 314,108
============ =========== ========== ========== ============ ===========
15
CONDENSED CONSOLIDATING BALANCE SHEET
FEBRUARY 1, 2003
------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 6,666 $ 445 $ -- $ -- $ 7,111
Receivables, less allowances
of $4,225....................... -- 24,575 382 -- -- 24,957
Inventories...................... -- 52,879 9,373 -- -- 62,252
Other current assets............. 1,507 6,097 304 -- -- 7,908
------------ ----------- ---------- ---------- ------------ -----------
Total current assets.......... 1,507 90,217 10,504 -- -- 102,228
Fixed assets at cost, less
accumulated depreciation and
amortization of $37,290.......... -- 47,550 2,913 -- -- 50,463
Excess reorganization value,
less accumulated amortization
of $26,372....................... -- 147,764 -- -- -- 147,764
Investment in and advances to
subsidiary....................... 156,113 29,659 -- -- (185,772) --
Other assets...................... -- 1,327 11 -- -- 1,338
------------ ----------- ---------- ---------- ------------ -----------
Total assets.................. $ 157,620 $ 316,517 $ 13,428 $ -- $ (185,772) $ 301,793
============ =========== ========== ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt.................. $ -- $ 425 $ -- $ -- $ -- $ 425
Revolving credit facility........ -- 10,480 -- -- -- 10,480
Net affiliate payable............ -- 115,208 42,547 -- (157,755) --
Accounts payable................. -- 20,521 226 -- -- 20,747
Accrued expenses................. 598 28,382 4,049 -- -- 33,029
------------ ----------- ---------- ---------- ------------ -----------
Total current liabilities..... 598 175,016 46,822 -- (157,755) 64,681
Long-term debt.................... -- 65,051 -- -- -- 65,051
Other long-term liabilities....... 1,434 15,313 (770) -- -- 15,977
Series A Redeemable Preferred
Stock -- Aggregate
liquidation preference $2,000.... 500 -- -- -- -- 500
Commitments and contingencies
Stockholders' equity:
Preferred stock.................. -- -- 214 -- (214) --
Common stock-- $.01 par
value; authorized
25,000,000 shares --
issued 13,903,227 shares........ 139 -- 341 -- (341) 139
Additional paid-in capital....... 166,390 -- 45,176 -- (45,176) 166,390
Accumulated other comprehensive
income......................... -- 496 -- -- -- 496
Retained deficit................. (11,441) 60,641 (78,355) -- 17,714 (11,441)
------------ ----------- ---------- ---------- ------------ -----------
Total stockholders' equity.... 155,088 61,137 (32,624) -- (28,017) 155,584
------------ ----------- ---------- ---------- ------------ -----------
Total liabilities and
stockholders' equity............. $ 157,620 $ 316,517 $ 13,428 $ -- $ (185,772) $ 301,793
============ =========== ========== ========== ============ ===========
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 1, 2003
------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 829 $ (4,151) $ 5,748 $ -- $ (1,597) $ 829
Adjustments to reconcile net
(loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization..... -- 11,041 551 -- -- 11,592
Write-off of unamortized bank
fees............................. -- 364 -- -- -- 364
Deferred rent..................... -- 1,891 329 -- -- 2,220
Deferred compensation............. 318 -- -- -- -- 318
Equity in net loss of subsidiary.. (1,597) -- -- -- 1,597 --
Decrease (increase) in:
Receivables...................... -- (4,788) 73 -- -- (4,715)
Inventories...................... -- (1,930) (3,728) -- -- (5,658)
Other current assets............. -- (50) 6 -- -- (44)
Long-term assets................. -- (1,901) -- -- -- (1,901)
Increase (decrease) in:
Accounts payable and accrued
expenses....................... (56) (4,822) 1,785 -- -- (3,093)
----------- ------------- ----------- ------- ---------- -------------
Net cash (used in) provided by
operating activities........... (506) (4,346) 4,764 -- -- (88)
----------- ------------- --------- ------- ---------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Fixed asset additions............. -- (5,395) (224) -- -- (5,619)
Investment in and advances to
subsidiary....................... 506 3,974 (4,480) -- -- --
---------- ------------ ---------- ------- ---------- ------------
Net cash provided by (used in)
investing activities.......... 506 (1,421) (4,704) -- -- (5,619)
---------- ------------- ---------- ------- ---------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit agreement.... -- 330,881 -- -- -- 330,881
Repayments of credit agreement.... -- (340,812) -- -- -- (340,812)
Proceeds from senior note
offering....................... -- 90,100 -- -- -- 90,100
Repayment of long term debt....... -- (58,064) -- -- -- (58,064)
Payment of deferred rent
obligation..................... -- (12,000) -- -- -- (12,000)
Debt origination costs............ -- (6,762) -- -- -- (6,762)
---------- ------------- --------- ------- ---------- ------------
Net cash provided by financing
activities.................... -- 3,343 -- -- -- 3,343
---------- ------------ --------- ------- ---------- ------------
Net (decrease) increase in cash
and cash equivalents............. -- (2,424) 60 -- -- (2,364)
Cash and cash equivalents--
beginning of period.............. -- 6,666 445 -- -- 7,111
---------- ------------ --------- ------- ---------- ------------
Cash and cash equivalents-- end
of period........................ $ -- $ 4,242 $ 505 $ -- $ -- $ 4,747
========== ============ ========= ======= ========== ============
17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 2, 2002
-------------------------------------------------------------------------------------------
BARNEY'S, GUARANTOR NON-GUARANTOR CONSOLIDATED
HOLDINGS INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................ $ 2,916 $ (294) $ 3,465 $ -- $ (3,171) $ 2,916
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.... -- 7,754 1,185 -- -- 8,939
Deferred rent.................... -- 1,699 75 -- -- 1,774
Write-off of unamortized bank
fees......................... -- 641 -- -- -- 641
Equity in net income of
subsidiary................... (3,171) -- -- -- 3,171 --
Decrease (increase) in:
Receivables..................... -- (4,444) (46) -- -- (4,490)
Inventories..................... -- (7,783) (3,132) -- -- (10,915)
Other current assets............ -- 547 18 -- -- 565
Increase (decrease) in:
Accounts payable and accrued
expenses...................... 2,008 (7,949) (937) -- -- (6,878)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities.......... 1,753 (9,829) 628 -- -- (7,448)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Fixed asset additions............ -- (9,538) (222) -- -- (9,760)
Reduction in restricted cash..... -- 200 -- -- -- 200
Investment in and advances to
subsidiary...................... (8,464) 9,170 (706) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities....... (8,464) (168) (928) -- -- (9,560)
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit agreement -- 338,690 -- -- -- 338,690
Repayment of credit agreement -- (325,548) -- -- -- (325,548)
Debt origination costs -- (1,458) -- -- -- (1,458)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities................. -- 11,684 -- -- -- 11,684
----------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents................. (6,711) 1,687 (300) -- -- (5,324)
Cash and cash equivalents--
beginning of period............. 6,797 3,347 678 13 -- 10,835
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents--
end of period................... $ 86 $ 5,034 $ 378 $ 13 $ -- $ 5,511
----------- ----------- ----------- ----------- ----------- -----------
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Statements
that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Forward-looking statements include
statements preceded by, followed by or that include the words "may," "could,"
"would," "should," "believe," "expect," "anticipate," "plan," "estimate,"
"target," "project," "intend," or similar expressions. These statements include,
among others, statements regarding the Company's expected business outlook,
anticipated financial and operating results, the Company's business strategy and
means to implement the strategy, the Company's objectives, the amount and timing
of future store openings and capital expenditures, the likelihood of the
Company's success in expanding its business, financing plans, working capital
needs and sources of liquidity.
Forward-looking statements are only estimates or predictions and are not
guarantees of performance. These statements are based on the Company's
management's beliefs and assumptions, which in turn are based on currently
available information. Important assumptions relating to the forward-looking
statements include, among others, assumptions regarding demand for the
merchandise the Company sells, the introduction of new merchandise, store
opening costs, expected pricing levels, the timing and cost of planned capital
expenditures, competitive conditions and general economic conditions. These
assumptions could prove inaccurate. Forward-looking statements also involve
risks and uncertainties, which could cause actual results to differ materially
from those contained in any forward-looking statement. Many of these factors are
beyond the Company's ability to control or predict. Such factors include, but
are not limited to, the following:
o the continued appeal of luxury apparel and merchandise;
o economic conditions and their effect on consumer spending;
o the Company's dependence on its relationships with certain designers;
o the Company's ability and the ability of its designers to design and
introduce new merchandise that appeals to consumer tastes and demands;
o events and conditions in the New York City area;
o new competitors entering the market or existing competitors expanding
their market presence;
o the Company's ability to accurately predict its sales;
o the continued service of the Company's key executive officers and
managers;
o the Company being controlled by its principal stockholders;
19
o the Company's ability to enforce its intellectual property rights and
defend infringement claims;
o interruptions in the supply of the merchandise the Company sells;
o changing preferences of the Company's customers;
o the Company's ability to borrow additional funds;
o the Company's substantial indebtedness;
o significant operating and financial restrictions placed on the Company
by the indenture governing Barney's, Inc.'s 9.000% senior secured
notes and the Company's credit facility; and
o other factors referenced in the Company's Annual Report on Form 10-K
for the fiscal year ended February 1, 2003, including those set forth
under "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking Statements."
The Company believes the forward-looking statements in this Form 10-Q
are reasonable. Forward-looking statements speak only as of the date they are
made, and the Company undertakes no obligation to update publicly any of them in
light of new information or future events.
Results of Operations
GENERAL
Net Sales
The Company sells to consumers through three inter-related
distribution channels consisting of full-price stores, outlet stores and
warehouse sale events. We determine comparable store net sales increases or
decreases using the net sales of all stores that are open as of the beginning
and end of both the pertinent fiscal period, regardless of store relocation or
expansion of existing square footage. Net sales of all stores closed during a
fiscal year are excluded from the determination of the comparable net store
sales increases (decreases) on a prospective basis effective with the date of
closing.
Expense classification
Cost of sales includes the cost of merchandise sold as well as costs
associated with the purchase of our merchandise primarily including inbound
freight and duty costs, buying agent costs, foreign exchange gains and losses on
settlement of foreign denominated purchases, sample costs and label costs. In
the current year, cost of sales also includes the impact of the implementation
of EITF 02-16 as discussed below. All other expenses, except depreciation and
amortization, interest and income taxes, but including internal transfer costs
and warehousing and distribution expenses, are included in selling, general and
administrative expenses, because the predominant costs associated with these
expenses, most notably occupancy costs and personnel costs, are general and
administrative in nature. Based on these classifications, our gross margins may
not be comparable to those of other entities, since some entities include the
costs related to their distribution network and retail store rent expenses in
cost of sales and others, like us, exclude them from gross margin, including
them instead in selling, general and administrative expenses.
20
Three Months Ended November 1, 2003 Compared to the Three Months Ended November
2, 2002
Net sales for the three months ended November 1, 2003 were $111.9
million compared to $103.3 million for the three months ended November 2, 2002,
an increase of 8.3%. Comparable store sales increased 7.8%. Sales in the period
benefited from an improving economic and retail atmosphere.
Gross profit on sales increased 9.6% to $50.7 million for the three
months ended November 1, 2003 from $46.2 million in the three months ended
November 2, 2002. This net increase is primarily attributable to the following:
the sales increase discussed above favorably impacted our gross profit by
approximately $3.0 million; reduced promotional selling favorably impacted our
gross profit by approximately $800,000; an increase in our estimated inventory
shortage unfavorably impacted our gross profit by approximately $200,000; the
reversal of an accrual no longer considered necessary favorably impacted our
gross profit by approximately $600,000; and the implementation of EITF 02-16
favorably impacted our gross profit by approximately $600,000. As a result,
gross profit as a percentage of net sales was 45.3% for the three months ended
November 1, 2003 compared to 44.8% for the three months ended November 2, 2002.
Selling, general and administrative expenses, including occupancy
expenses, increased 2.6% in the three months ended November 1, 2003 to $40.8
million from $39.7 million in the three months ended November 2, 2002. In the
three months ended November 1, 2003, personnel and related benefit costs
increased in the aggregate approximately $300,000. This increase resulted from
various factors principally including raises and higher variable personnel costs
in line with the increased sales discussed above. In addition, net occupancy
costs increased approximately $200,000, primarily driven by significant
increases in real estate taxes associated with our New York area locations. In
connection with the provisions of EITF 02-16, in the third quarter ended
November 1, 2003, the Company recorded approximately $700,000 of vendor
cooperative advertising contributions as a reduction of cost of sales rather
than a reduction of advertising expense. As a result of this new treatment, net
advertising expense for the current quarter is approximately $100,000 greater
than the year ago period. Excluding the impact of EITF 02-16, our advertising
costs were significantly below the prior year due to a strategic decision to
shift additional advertising dollars to support our holiday sales initiatives in
the fourth quarter. In addition, there were other individually less significant
increases, driven in part by increased sales, which were partially offset by
individually less significant reductions in various overhead expenses resulting
from the Company's continued cost reduction efforts. As a percentage of sales,
selling, general and administrative expenses declined to 36.4% in the three
months ended November 1, 2003 from 38.5% in the three months ended November 2,
2002.
Depreciation and amortization increased 8.7% in the three months
ended November 1, 2003 to $2.9 million from $2.7 million in the three months
ended November 2, 2002 as a result of the additional depreciation related to the
capital projects completed over the last couple of years, principally in the
Company's Madison Avenue flagship store.
21
Interest expense, net increased 60.1% in the three months ended
November 1, 2003 to $4.0 million from $2.5 million in the three months ended
November 2, 2002, as a result of the increased cost of capital associated with
Barney's, Inc.'s senior notes issued on April 1, 2003. The Company's dependence
on borrowings from its credit facility are largely seasonal in nature,
especially with the new long-term debt in place. Accordingly, average borrowings
under the Company's credit facility for the three months ended November 1, 2003
declined to $7.6 million from $36.1 million at November 2, 2002.
Other income, which primarily includes finance charge income in
connection with the Company's private label credit card operations decreased
24.2% in the three months ended November 1, 2003 to $1.2 million from $1.6
million in the three months ended November 2, 2002.
The Company's net income for the three months ended November 1, 2003
and November 2, 2002 was $4.1 million and $2.9 million, respectively. Basic and
diluted net income per common share for the three months ended November 1, 2003
and November 2, 2002 were $0.29 and $0.21, respectively.
Nine Months Ended November 1, 2003 Compared to the Nine Months Ended November 2,
2002
Net sales for the nine months ended November 1, 2003 were $292.0
million compared to $277.4 million in the year ago period, an increase of 5.3%.
Comparable store sales increased approximately 4.9%. The stronger sales trends
exhibited in the last two quarters, resulting from the improving economy and
retail atmosphere, reversed the sales declines of the first quarter which were
impacted by the weak economy, the war in Iraq and unusually severe weather
conditions, particularly in the northeast.
Gross profit on sales increased 2.5% to $132.0 million for the nine
months ended November 1, 2003 from $128.9 million in the nine months ended
November 2, 2002. This net increase is primarily attributable to the following:
the sales increase discussed above favorably impacted our gross profit by
approximately $6.0 million; increased promotional selling unfavorably impacted
our gross profit by approximately $900,000; foreign exchange losses (driven by
the weak US dollar) on settlement of foreign denominated purchases and a
declining initial mark-up, unfavorably impacted our gross profit by
approximately $3.0 million; an increase in our actual and estimated inventory
shortage unfavorably impacted our gross profit by approximately $700,000; the
reversal of an accrual no longer considered necessary favorably impacted our
gross profit by approximately $600,000; and the implementation of EITF 02-16
favorably impacted our gross profit by $1.1 million. As a result, gross profit
as a percentage of net sales was 45.2% for the nine months ended November 1,
2003 compared to 46.5% in the year ago period.
Selling, general and administrative expenses, including occupancy
expenses, increased 1.5% in the nine month period ended November 1, 2003 to
$115.5 million from $113.7 million in the nine month period ended November 2,
2002. In the nine months ended November 1, 2003, personnel and related benefit
22
costs increased approximately $500,000 due principally to raises and higher
variable costs associated with the sales increases discussed above. The
Company's benefit costs were higher in the first nine months of the year as
compared to the prior year period, which included an approximate $800,000
benefit related to a one-time concession received by the Company related to a
renegotiated collective bargaining agreement. In addition, insurance expense
increased approximately $500,000, due primarily to higher premiums, and net
occupancy costs increased approximately $600,000, primarily driven by
significant increases in real estate taxes associated with our New York area
locations. In connection with the provisions of EITF 02-16, in the nine months
ended November 1, 2003, the Company recorded approximately $1.1 million of
vendor cooperative advertising contributions as a reduction of cost of sales
rather than a reduction of advertising expense. As a result of this new
treatment, net advertising expense for the nine months is approximately $600,000
greater than the year ago period. Excluding the impact of EITF 02-16, our
advertising costs were significantly below the prior year due to a strategic
decision to shift additional advertising dollars to support our holiday sales
initiatives in the fourth quarter. In addition, there were other individually
less significant increases, driven in part by increased sales, which were
partially offset by individually less significant reductions in various overhead
expenses resulting from the Company's continued cost reduction efforts. As a
percentage of sales, selling, general and administrative expenses declined to
39.5% in the nine months ended November 1, 2003 from 41.0% in the nine months
ended November 2, 2002.
Depreciation and amortization increased 7.7% in the nine month period
ended November 1, 2003 to $8.5 million from $7.9 million in the prior year
period as a result of the additional depreciation related to the capital
projects completed over the last couple of years, principally in the Company's
Madison Avenue flagship store.
Interest expense, net increased 32.3% in the nine months ended
November 1, 2003 to $11.2 million from $8.5 million in the nine months ended
November 2, 2002, principally as a result of the increased cost of capital
associated with Barney's, Inc.'s senior notes issued on April 1, 2003. The
Company's dependence on borrowings from its credit facility are largely seasonal
in nature, especially with the new long-term debt in place. Accordingly, average
borrowings under the Company's credit facility for the nine months ended
November 1, 2003 declined to $10.5 million from $32.6 million at November 2,
2002.
Other income, which primarily includes finance charge income in
connection with the Company's private label credit card operations, approximated
$4.5 million in both the current and prior year nine month periods. Other income
for the nine months ended November 1, 2003 also includes $750,000 related to a
cash payment received by the Company in connection with an amendment to the
existing license agreement and the granting of its consent to certain matters
relating to the establishment of an additional Barneys New York store in Japan.
Other income for the nine months ended November 2, 2002 also includes $400,000
related to the assignment of a subsidiary's interest in a trademark unrelated to
the Company's business.
The Company's net income for the nine months ended November 1, 2003
was $0.8 million compared to net income of $2.9 million for the nine months
ended November 2, 2002. Basic and diluted net income per common share for the
nine months ended November 1, 2003 and November 2, 2002 were $0.06 and $0.21,
respectively.
23
LIQUIDITY AND CAPITAL
Liquidity and Capital Resources
Cash used in operations for the nine months ended November 1, 2003
and November 2, 2002 was approximately $88,000 and $7.5 million, respectively.
This decrease is primarily a result of reduced working capital requirements
primarily related to inventory and accounts payable. The Company's working
capital was $51.6 million at November 1, 2003 compared to $37.5 million at
February 1, 2003. The Company's primary source of liquidity has been borrowings
under its credit facility, although such reliance has been lessened with the new
long term debt structure resulting from the senior notes offering and the
Company's operating performance.
The Company incurred capital expenditures of $5.6 million during the
nine months ended November 1, 2003. Of the total capital expenditures, $2.9
million was spent on leasehold improvements, $2.2 million was spent on
furniture, fixtures and equipment and $500,000 was spent on management
information systems. Pursuant to the covenants contained in the Company's credit
facility, the Company's total capital expenditures for fiscal year 2003 were
established at a base level of $10 million subject to certain permitted
adjustments. The Company will principally fund its capital expenditures through
cash generated from operations or through borrowings under its credit facility.
SENIOR NOTES OFFERING
On April 1, 2003, the Company completed an offering of 106,000 units
at a price of $850 per unit, for gross proceeds of $90.1 million. Each unit
consisted of $1,000 principal amount at maturity of 9.000% senior secured notes
due April 1, 2008 of Barney's, Inc., a wholly owned subsidiary of Holdings, and
one warrant to purchase 3.412 shares of common stock of Holdings at an exercise
price of $0.01 per share. $106.0 million aggregate principal amount at maturity
of notes were issued, together with an aggregate of 106,000 warrants to acquire
an aggregate of 361,672 shares of common stock of Holdings. The warrants expire
on April 1, 2008. Approximately $1.9 million of the proceeds from the offering
was allocated to the warrants and the remainder of the proceeds was allocated to
the notes. The total debt discount of $17.8 million is being amortized over the
life of the notes. Interest is payable semi-annually on April 1 and October 1
commencing on October 1, 2003.
On or after April 1, 2006 and April 1, 2007, Barney's, Inc., at its
option, may redeem some or all of the notes at a redemption price of 109.894% of
accreted value, and 100% of principal amount at maturity, respectively, in all
cases plus accrued and unpaid interest. Prior to April 1, 2005, Barney's, Inc.
can utilize the proceeds of certain equity offerings to redeem up to 35% of the
aggregate principal amount at maturity of the notes, at a redemption price equal
to 113.192% of accreted value plus accrued and unpaid interest. If Barney's,
Inc. experiences a change of control, each holder of the notes will have the
right to sell to Barney's, Inc. all or a portion of their notes at 101% of their
accreted value, plus accrued and unpaid interest, to the date of repurchase.
24
The Company entered into a registration rights agreement relating to
the notes, pursuant to which the Company was required to file one or more
registration statements within specified time periods to provide for the
exchange of the notes for freely tradable notes with substantially identical
terms. During the third quarter the Company satisfied its obligations under this
agreement.
In connection with the offering, Holdings agreed that upon receipt of
a written request from the holders of at least 5% of the shares issuable upon
exercise of the warrants, Holdings will, as promptly as practicable, file a
shelf registration statement covering the resale of the shares issuable upon
exercise of the warrants. Holdings may, at its option, file a registration
statement covering the resale of the shares issuable upon exercise of the
warrants.
Net proceeds to the Company from the offering were approximately
$81.7 million after deducting commissions, financial advisory fees and estimated
expenses (collectively referred to as the "Offering Fees") of the offering. The
Offering Fees of approximately $8.4 million were deferred and are included in
other assets. Such amount will be amortized to interest expense over the term of
the notes. The net proceeds from the offering were used to repay the $22.5
million Subordinated Note; the Equipment Notes; the Term Loan and a portion of
the Revolver loans outstanding under the GE Facility; and a substantial portion
of the Company's deferred lease obligations pursuant to its flagship leases. The
prepayment of the $22.5 million Subordinated Note and the Equipment Notes
aggregated approximately $58.1 million and resulted in a gain on early
extinguishments of debt of approximately $200,000.
The 9.000% senior secured notes are guaranteed on a senior secured
basis by Holdings and each of the existing and future domestic restricted
subsidiaries of Barney's, Inc. The 9.000% senior secured notes and the related
guarantees are secured by a second-priority lien on the same assets as secure
the Company's credit facility.
REVOLVING CREDIT AGREEMENT
On July 15, 2002, the Company entered into a $105,000,000 Credit
Facility led by General Electric Capital Corporation, as Administrative Agent
(the "GE Facility"). The GE Facility provided a $97,000,000 revolving loan
commitment (the "Revolver") with a $40,000,000 sub-limit for the issuance of
letters of credit and an $8,000,000 term loan commitment (the "Term Loan").
Contemporaneously with the consummation of the senior notes offering, the
Company repaid the term loan outstanding under the GE Facility and entered into
a restated credit facility on the terms of the existing GE Facility as amended
on April 1, 2003, to provide for a $70.0 million revolving credit facility
pursuant to which the Company may borrow up to $66.0 million, with a $40.0
million sub-limit for the issuance of letters of credit, subject to a borrowing
base test. With the consent of the required lenders under the restated credit
facility, the maximum borrowing amount may be increased to up to $70.0 million.
The restated credit facility eliminated, among other things, the 30 day
clean-down provision and amended the financial covenants in the GE Facility, and
also added a minimum excess borrowing base availability covenant, all as
outlined below.
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In connection with the origination of the GE Facility, the Company
incurred fees of approximately $1,500,000. In connection with the above
mentioned restatement of that facility, the Company incurred fees of
approximately $384,000 and wrote-off fees associated with the origination of the
GE Facility of $364,000 which amount is included in interest and financing costs
for the nine months ended November 1, 2003. The unamortized portion of such fees
is being amortized over the life of the restated credit facility as interest and
financing costs and is included in Other Assets.
A summary of the financial covenants and other terms of the restated
credit facility are as follows:
The restated credit facility is secured by a first-priority lien on
substantially all of the Company's assets, other than real property leaseholds.
The assets that secure the Company's restated credit facility include, but are
not limited to, the Company's accounts receivable, inventories, general
intangibles (including software), equipment and fixtures, equity interests of
subsidiaries owned by the Company, intellectual property and cash. In addition,
each borrower under the restated credit facility is required to cross-guarantee
each of the other borrowers' obligations under the restated credit facility, and
the assets of each borrower secure such borrower's cross guarantee.
Availability under the restated credit facility is calculated as a
percentage of eligible inventory and receivables, including finished inventory
covered by undrawn documentary letters of credit and Barneys private label
credit card receivables, less certain reserves.
Interest rates on borrowings under the restated credit facility are
either the "base rate," as defined in the restated credit facility, plus 1.00%
or LIBOR plus 2.50%, subject to quarterly adjustment after August 2, 2004. The
restated credit facility also provides for a fee of 2.0% per annum on the
maximum amount available to be drawn under each outstanding letter of credit and
a tiered unused commitment fee with a weighted average of approximately 0.45% on
the unused portion of the credit facility.
The restated credit facility contains financial covenants relating to
net worth, earnings (specifically, earnings before interest, taxes, depreciation
and amortization, or "EBITDA"), capital expenditures and minimum excess
borrowing base availability as outlined below. With the exception of the capital
expenditures covenant, with which compliance is measured on an annual basis, and
the minimum excess borrowing base availability covenant, with which the Company
must be in compliance at all times, the covenants discussed below are required
to be satisfied on a quarterly basis.
o Minimum consolidated net worth -- As of the last day of every fiscal
quarter, consolidated net worth must not be less than specified
minimum amounts. The minimum amount is $136.0 million at the end of
the fiscal year ending January 31, 2004; $147.0 million at the end of
the fiscal year ending January 29, 2005; and $147.0 million at the end
of the fiscal year ending January 28, 2006.
26
o Minimum consolidated EBITDA -- As of the last day of every fiscal
quarter (for defined trailing periods), EBITDA must not be less than
certain minimum amounts, measured on a quarterly basis. The minimum
amount at the end of the fiscal year ended January 31, 2004 is $25.0
million; $29.0 million at the end of the fiscal year ending January
29, 2005; and $30.0 million at the end of the fiscal year ending
January 28, 2006.
o Capital expenditures-- The Company's total capital expenditures for
the fiscal year ending January 31, 2004 and thereafter, is $10.0
million per fiscal year, subject to increase if certain conditions are
met.
o Minimum excess borrowing base availability-- The Company is required
to maintain minimum excess borrowing base availability of $8.0 million
at all times.
The restated credit facility matures on July 15, 2006.
Based on the Company's current level of operations, the Company
believes its cash flow from operations, available cash and available borrowings
under its restated credit facility will be adequate to meet its liquidity needs
for at least the next 12 months, including scheduled payments of interest on its
9.000% senior secured notes and payments of interest on borrowings under the
restated credit facility. The Company's ability to make payments on and to
refinance its indebtedness and to fund planned capital expenditures will depend
on its ability to generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive, regulatory and other
factors beyond the Company's control.
At November 1, 2003, the Company had approximately $36.8 million of
availability under the restated credit facility, after considering $8.1 million
and $20.2 million of loans and letters of credit, respectively, outstanding and
the minimum excess borrowing base availability of $8.0 million.
As of November 1, 2003, the Company was in compliance with all of the
financial covenants contained in its restated credit facility. Management
believes that it will continue to be in compliance with the financial covenants
contained in the restated credit facility for the remainder of the fiscal year
ending January 31, 2004. However, any material deviations from the Company's
forecasts could require the Company to seek waivers or amendments of covenants,
alternative sources of financing or to reduce expenditures. There can be no
assurance that such waivers, amendments or alternative financing could be
obtained, or if obtained, would be on terms acceptable to the Company.
C. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities ("VIE's"), an interpretation of
Accounting Research Bulletin No. 51" ("Interpretation No. 46"). Interpretation
No. 46 requires the consolidation of entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the entity's
27
expected residual returns, or both, as a result of ownership, contractual or
other financial interests in an entity. Currently, entities are generally
consolidated by an enterprise when it has a controlling financial interest
through ownership of a majority voting interest in the entity. The provisions of
Interpretation No. 46 are required to be adopted by the Company immediately for
all VIE's entered into since February 2, 2003 and by the end of the fiscal year
ending January 31, 2004, for all VIE's that existed prior to February 2, 2003.
The Company is currently evaluating the requirements and impact of
Interpretation No. 46, however, at the present time, the Company does not
believe there are any additional entities that will require disclosure or
consolidation as a result of the provisions of Interpretation No. 46.
In May 2003, the FASB issued Statement No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company adopted SFAS No. 150 in the third quarter ended November
1, 2003. The adoption of SFAS No. 150 did not have a material effect on the
Company's consolidated financial statements.
In 2002, the FASB Emerging Issues Task Force ("EITF") issued EITF No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses the
accounting by a reseller for consideration received from a vendor. A consensus
was reached that cash consideration is presumed to be a reduction in the price
of a vendor's product that should be recognized as a reduction of cost of sales.
However, this presumption can be overcome when the consideration received is for
the reimbursement of specific, identifiable and incremental costs of the
reseller. In that event, the consideration, subject to a threshold, is
recognized as a reduction in selling, general and administrative expenses. The
provisions of EITF 02-16 are effective for all new arrangements, or
modifications to existing arrangements, entered into after December 31, 2002.
In the three months ended November 1, 2003, the provisions of EITF
02-16 had the effect of increasing selling, general and administrative expenses
by $666,000 and decreasing cost of sales and net income by $628,000 and $38,000,
respectively. In the nine months ended November 1, 2003, the provisions of EITF
02-16 had the effect of increasing selling, general and administrative expenses
by approximately $1.1 million and decreasing cost of sales and net income by
approximately $1.1 million and $38,000, respectively. EITF 02-16 had no impact
on the Company's cash flows. Had EITF 02-16 been in effect for the three and
nine months ended November 2, 2002, selling, general and administrative expenses
would have increased by approximately $335,000 and cost of sales and net income
would have decreased by approximately $307,000 and $28,000, respectively, in the
three month period. For the nine month period, selling, general and
administrative expenses would have increased by approximately $631,000 and cost
of sales and net income would have decreased by approximately $603,000 and
$28,000, respectively.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks
since the end of the most recent fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
Holdings' management evaluated, with the participation of Holdings'
principal executive and principal financial officers, the effectiveness of
Holdings' disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of November 1, 2003. Based on their evaluation, Holdings' principal
executive and principal financial officer concluded that Holdings' disclosure
controls and procedures were effective as of November 1, 2003.
There has been no change in Holdings' internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during Holdings' fiscal quarter ended November 1, 2003, that has
materially affected, or is reasonably likely to materially affect, Holdings'
internal control over financial reporting.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which are
routine and incidental to the conduct of its business. Management believes that
none of these proceedings, if determined adversely to the Company, would have a
material effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
- --- ----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The following Report on Form 8-K was filed or furnished during the
three months ended November 1, 2003:
A Form 8-K was furnished on September 9, 2003, under Item 12, relating to
Holdings' September 9, 2003 press release setting forth Holdings' second quarter
2003 earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 16, 2003
BARNEYS NEW YORK, INC.
By: /s/ Steven M. Feldman
---------------------------------
Name: Steven M. Feldman
Title: Executive Vice President,
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32